Have Exchange Traded Funds influenced commodity market volatility?
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Twomey, C. and Corbet, S. (2014) 'Have Exchange Traded Funds influenced commodity market volatility?' International Journal of Economics and Financial Issues, 4.
Exchange Traded Funds (ETFs) have existed since the late 1980s, but were first traded on commodity markets in the early 2000s. Their inception has been linked by some market analysts with the large commodity price increases and volatility evident between 2007 and 2009. This research provides a concise literature review based on ETFs and then focuses on the role that the product has played, either as an accelerant for mispricing in international commodity markets, or as a mechanism for liquidity improvements, thereby increasing the speed of the transfer of information. This research also investigates whether the effects are more pronounced in larger or smaller sized commodity markets. The results indicate that larger market-proportional ETF holdings are associated with higher EGARCH volatility. Smaller commodity markets are found to have increased liquidity flows, indicating benefits from ETF investment. The need for further regulation of investment size and market ownership limits cannot be rejected